POLITICAL ECONOMY

The High Price of L.A.'s Addiction to Business Fees

June 02, 1996|Joel Kotkin | Joel Kotkin, a contributing editor to Opinion, is a senior fellow at the Pepperdine Institute of Public Policy and at the Pacific Research Institute. He is also business-trends analyst for Fox TV

The Los Angeles City Council seems constitutionally incapable of learning the key lesson of modern urban governance: Only cities that are capable of appealing to and retaining wealth-creating businesses can hope to provide adequate services to their residents.

Faced with a money shortfall because it fears that Mayor Richard Riordan's budget, which relies on LAX and port revenue transfers, is built on legal sand, the City Council returned to the old wells of raising fees and hiking some taxes to balance the books. It is not a decision likely to accelerate L.A.'s economic recovery.

In its attempt to reverse the city's decline, the Riordan administration has been most effective in cutting individual deals--the Van Nuys GM plant, for example--that shepherd companies or projects around the city's fee and regulatory regime. But Riordan's attempts to implement desperately needed reforms have been stymied by the administration's sometimes high-handed relations with council members.

Already, amid a strong regional recovery, the city is lagging behind its neighbors in everything from industrial investment and job creation to retail sales and property values. "We're in danger of becoming the hole in the doughnut," warns Dan Garcia, an advisor to Progress L.A., a group seeking to streamline the city's bureaucracy.

Filling the leadership vacuum created by Riordan's political ineptness, the council seems bent on perfecting what could be called "supply side" economics in reverse--taxing and regulating enterprises to feed its sprawling bureaucracy. In apparent deference to public employee unions, for example, it refuses to consider contracting out such work as parking enforcement. It maintains its own staff of elevator inspectors and an electrical testing lab, jobs contracted out to private companies or performed by the state of California in virtually every other California city. Generous labor contracts, involving both union and non-union personnel, translates to higher fire and workers' compensation insurance than most surrounding cities. The list could go on.

To pay the bills, Los Angeles has become more addicted to levying fees on businesses than any large city in the region. Indeed, 61% of the city's revenue is fee-related. The problem is that such a heavy reliance on fees forecloses other revenue options, like sales taxes, because it frightens, or chases away, businesses.

"The reason business-license fees and building fees are so high [in Los Angeles] is that you're supporting a big family," says consultant Larry Kosmont, a former director of community development in Burbank and city manager of Bell Gardens. "That leads a lot of companies to reject moving into L.A. because the fees will kill them."

The cost differential between setting up a business in Los Angeles and in surrounding cities is substantial enough to scare off many a small company, increasingly the engine of L.A.'s economy. In Ontario, a 60,000-square-foot office project costs a maximum of $54,000 in local fees; in Los Angeles, that same project would cost $1 million in fees. For a 50,000-square-foot manufacturing facility, Ontario charges a maximum of $18,000 in fees, compared with more than $200,000 in Los Angeles.

Similar differentials exist for companies that simply want to occupy built space, something Los Angeles possesses in huge quantities. The average costs of a business license, utility and other fees for, say, an electrical-equipment manufacturer using 50,000 square feet ranges from zero in unincorporated parts of Riverside County to $1,550 in Ontario, less than one-third the fees charged in Phoenix. In Los Angeles, the same company would pay $23,860. Even Orange County, hardly a cheap business location, charges fees, for both developers and new tenants, in industrial cities that are a fraction of those in Los Angeles.

By providing relatively high levels of public safety--one reward of a thriving city economy--and pro-business administrations, such cities as Burbank, Glendale, West Hollywood and Culver City are well on their way to capturing the bulk of the expansion of entertainment, multimedia and other information-age companies.

Essentially, these cities offer the location advantages of being in the midst of Los Angeles' talent pool and infrastructure without being subjected to the city's burdensome cost structure. Although closer to downtown Los Angeles than many parts of the city proper, Burbank, for example, charges developers of office space a maximum of $6.38 a square foot, about half that charged by Los Angeles. For the average business-service provider using 30,000 square feet of space, fees in Burbank average about $12,000, compared with $116,000 in Los Angeles; the electrical-equipment manufacturer in Burbank pays roughly $8,980 a year in fees, while its L.A. counterpart spends $23,860.